Sweden cuts main interest rate to zero

CharlesDuxbury

STOCKHOLM--Sweden's central bank cut its main interest rate to zero on Tuesday, in an attempt to boost inflation, which has once again fallen below expectations.

The Riksbank lowered its main repurchase, or repo, rate from the previous level of 0.25%. The cut was larger than expected, with analysts polled by The Wall Street Journal forecasting a reduction to 0.05%.

In response to the cut the Swedish krona sank to a four-year low against the dollar, with the dollar climbing 0.7% to 7.3549 kronor, and a three-month low against the euro.

The Riksbank last cut borrowing costs in July seeking to boost inflation, which has been stuck around zero for most of this year, well below the 2% inflation target set for the central bank by lawmakers.

"Inflation is too low," the central bank, the world's oldest, said in a statement. "The repo rate needs to remain at this level until inflation clearly picks up," it said.

The bank said it didn't expect to begin raising interest rates until the middle of 2016 when it sees an economic upswing in both Sweden and abroad lifting inflationary pressure. It had previously said it would begin increasing rates toward the end of 2015.

The measure of underlying inflation most closely watched by the central bank, known as CPIF, came in at 0.3% in September, a full 0.4 percentage point below the Riksbank's most recent forecast.

Riksbank rate setters such as Per Jansson have said that their tolerance for further inflation disappointments has been exhausted so Tuesday's interest rate cut wasn't a great surprise.

Still, investors judged the Riksbank statement to be slightly more expansive than expected and the krona weakened against the euro, which rose to 9.34 kronor from 9.25 kronor.

This week's meeting was the first without Karolina Ekholm, a longtime dovish member of the six member rate setting board, who quit earlier this month to take up a position as an adviser to Sweden's finance minister following a recent change of government.

Ms. Ekholm long disagreed with Riksbank Governor Stefan Ingves who argued that the central bank should consider Sweden's high level of private debt when setting its benchmark interest rate. Ms. Ekholm argued for more focus on inflation.

All else being equal, a focus on rising household debt would push a central bank to prefer higher interest rates so as to cool demand for loans.

Mr. Ingves's thinking held sway from December last year until July this year and the benchmark rate was left unchanged during that period at 0.75% despite the very low inflation rate.

That drew criticism from local trade unions and some economists who argued that the central bank was flirting with a dangerous bout of deflation--where prices fall for a lengthy period sapping consumers' willingness to spend and making debt harder to pay off.

Tuesday's policy statement underscored the fact that the Riksbank's focus is now squarely on raising inflation.

Monitoring economic progress in Sweden alone won't be enough to the achieve this though. Given the small and open nature of the Swedish economy, part of the Riksbank's job is to keep a watchful eye on the policies of other larger central banks, especially the European Central Bank.

The ECB's efforts to boost eurozone inflation, including a benchmark interest rate of 0.05%, a negative rate on bank deposits and a program to buy large amounts of private-sector debt, arguably forced the Riksbank to respond at this meeting.

A higher interest rate in Sweden than in the eurozone would draw investors into the Nordic country, raising the value of the krona and stifling imported inflation and making it still harder for the Riksbank to meet its goals.

Governor Ingves told a news conference that he remains concerned about rising household debt in Sweden saying that the country needs a package of measures to get to grips with the situation. The ratio of household debt to disposable income in the country is about 175%, which is high compared with other countries.

In its statement, the Riksbank said the fact that the repo rate is now being lowered further will increase the risks associated with high household indebtedness.

"It is therefore even more urgent now that these risks are managed," it said. "Reducing the risks requires measures aimed directly at household demand for credit," it said.

The Swedish central bank's board next meeting is scheduled for mid-December.

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